living - faithlife · pdf fileliving christian values building ... (note 9) 9,021 8,937 total...

LIVING CHRISTIAN VALUES

BUILDING A BETTER WORLD

PROTECTING FINANCIAL FUTURES

2016 ANNUAL REPORT

YEAR ENDED DECEMBER 31, 2016 | FINANCIAL STATEMENTS

Financial Statements of

FAITHLIFE FINANCIAL

Year ended December31, 2016

KPMG LLP

11 5 King Street South2nd Floor

Waterloo ON N2J 5A3

Tel 519-747-8800

Fax 519-747-8830

INDEPENDENT AUDITORS’ REPORT

To the Members and Directors of FaithLife Financial

We have audited the accompanying financial statements of FaithLife Financial,

which comprise the statement of financial position as at December 31, 2016, the

statements of income, comprehensive income, changes in surplus, and cash

flows for the year then ended, and notes. comprising a summary of significant

accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these

financial statements in accordance with International Financial Reporting

Standards, and for such internal control as management determines is necessary

to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based

on our audit. We conducted our audit in accordance with Canadian generally

accepted auditing standards. Those standards require that we comply with

ethical requirements and plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the

amounts and disclosures in the financial statements. The procedures selected

depend on our judgment, including the assessment of the risks of material

misstatement of the financial statements, whether due to fraud or error. In

making those risk assessments, we consider internal controls relevant to the

entity’s preparation and fair presentation of the financial statements in order to

design audit procedures that are appropriate in the circumstances, but not for

the purpose of expressing an opinion on the effectiveness of the entity’s internal

controls. An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the financial

statements.

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We believe that the audit evidence we have obtained in our audit is sufficient

and appropriate to provide a basis for our audit opinion.

Opin ion

In our opinion, the financial statements present fairly, in all material respects, the

financial position of FaithLife Financial as at December 31, 2016 and its financial

performance and its cash flows for the year then ended in accordance with

International Financial Reporting Standards.

/7/46 ILP

Chartered Professional Accountants, Licensed Public Accountants

February 22, 2017

Waterloo, Canada

FAITHLIFE FINANCIALStatement of Financial Position(In thousands of dollars)

December311 2016, with comparative figures for 2015

2016 2015

Assets

Cash and cash equivalents (note 5) $ 6,547 $ 8,627

Accrued investment income 2,077 2,204

Insurance and other receivables (note 6) 639 2,986

Bonds and debentures 172,546 176,190

Stocks 28,219 23,541

Equity pooled funds 9,903 6,548

Mutual funds 1,131 1,054

Real estate pooled funds - 21

Mortgage loans on real estate (note 4(c)) 65,647 68,706

Current taxes receivable 218 199

Reinsurance recoverable (note 8) 2,455 (579)Policy loans 10,662 10,859Segregated fund assets (note 21) 103,877 101,439Investment property 3,963 4,044

Property and equipment (note 7) 11,473 11,744

Investment in subsidiary (note 20(a)) - 250Other assets 524 609

Total assets $ 419,881 $ 418,442

Liabilities

Expenses due and accrued $ 668 $ 941Insurance contract liabilities (note 8) 244,349 245,269Members’ dividends, policy proceeds

and other amounts on deposit 14,217 14,860Provision for members’ dividends 3,503 3,597Policy benefits in the course of settlement

and provision for unreported claims 841 1,101Segregated fund liabilities (note 21) 103,877 101,439Subordinated debt (note 10) 4,282 4,417Other liabilities (note 9) 9,021 8,937

Total liabitities 380,758 380,561

Surplus

Appropriatedsurplus 1,190 1,163Unappropriated surplus 41,197 40,471Accumulated other comprehensive loss (3,711) (4,200)Revaluation reserve 447 447

Total surplus 39,123 37,881

Total liabilities and surplus $ 419,881 $ 418,442

See accompanying notes to financial statements.çED

__________________________

Director

__________________________

DirectorI.,

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FAITHLIFE FINANCIALStatement of Income(In thousands of dollars)

Year ended December31, 2016, with comparative figures for 2015

2016 2015

Revenue:Gross premiums written:

Life insurance $ 17,665 $ 17,707Annuities 5,282 4,016Health insurance 747 767

23,694 22490Less: premiums ceded to reinsurers (2,250) (2,150)

Net premiums 21,444 20,340

Fee income 2,478 2,734

Investment income 13,189 12,638Realized gains on financial assets 480 1,720Net fair value losses on financial assets

at fair value through profit or loss (35) (3,491)Net investment income (note 14) 13,634 10,867

Other income 528 (428)Total revenue 38,084 33,513

Policy benefits and expenses:Gross benefits and claims paid 21,142 24,540Benefits and claims ceded to reinsurers (1,683) (1,845)Change in policy liabilities (note 8(d)) (920) (11 407)Change in policy liabilities ceded to reinsurers (3,034) 1,294Members’ dividends 3,340 3,474Interest on amounts on deposit 365 392Net policy benefits and expenses 19,510 16,448

General expenses:Investmentexpenses 760 1,285Interest expense 330 338Commissions 2,999 3,302Salaries and benefits (note 18) 6,445 6,085Depreciation of properly and equipment 1,255 1,168Other 5,145 3,910Fraternal benefits 476 567

17,410 16,655

Total expenses 36,920 33,103

Income before tax 1,164 410

Corporate taxes (note 16) 388 152

Net income $ 776 $ 258

See accompanying notes to financial statements.

2

FAITHLIFE FINANCIALStatement of Comprehensive Income(In thousands of dollars)

Year ended December 31, 2016, with comparative figures for 2015

2016 2015

Net income $ 776 $ 258

Other comprehensive income (loss):Unrealized gains (losses) on available-for-sale assets 927 (1,160)Reclassification of realized gains on

available4or-sale assets and recoveries to net income (480) (1,720)Remeasurements of defined benefit liability 42 (371)

Total other comprehensive income (loss) 489 (3,251)

Total comprehensive income (loss) $ 1,265 $ (2,993)


3

FAITHLIFE FINANCIALStatements of Changes in Surplus(In thousands of dollars)

Year ended December31. 2016, with comparative figures for 2015

Appropriated Unappropriated Revaluationsurplus surplus AOCI reserves Total

Balance, December 31, 2014 $ 1,136 $ 40,258 $ (949) $ 267 $ 40,712

Net income - 258 - - 258

Losses on available-for-salesecurities - - (2,880) - (2,880)

Building re-appraisal - - - 180 180

Appropriations 45 (45) - - -

Disaster relief benefits (18) - - - (18)

Remeasurement of definedbenefit liability - - (371) - (371)

Balance, December 31, 2015 $ 1,163 $ 40,471 $ (4,200) $ 447 $ 37,881

Net income - 776 - - 776

Gains on available-for-salesecurities - - 447 - 447

Appropriations 50 (50) - - -

Disaster relief benefits (23) - - - (23)

Remeasurement of definedbenefit liability - - 42 - 42

Balance, December31, 2016 $ 1,190 $ 41,197 $ (3,711) $ 447 $ 39,123


4

FAITHLIFE FINANCIALStatement of Cash Flows(In thousands of dollars)

Year ended December31 2016, with comparative figures for 2015

2016 2015

Cash provided by (used in):

Operating activities:Net income $ 776 $ 258Items not involving cash:

Decrease in policy liabilities (3,954) (10,113)Decrease in provision for members’ dividends (94) (308)Decrease in members’ dividends and

other amounts on deposit (643) (666)Change in fair value of FVrPL securities 35 3,491Realized gain on sale of AFS securities (480) (1,721)Amortization of property and equipment 1,272 1,092Other 2,719 203

Interest paid (330) (338)Taxes paid (388) (266)

(1,087) (8,368)

Investing activities:Proceeds of bonds sold and matured 8,192 68,128Bonds purchased (5,757) (53,424)Proceeds of stocks sold and redeemed 1,466 11,366Stocks purchased (4,074) (11,031)Proceeds of equity pooled funds sold 3,885 249Equity pooled funds purchased (7,403) (256)Proceeds of mutual funds sold 39 42Mutual funds purchased (55) (49)Mortgages loan principal receipts 10,199 15,222Mortgage loans advanced (7,140) (24,766)Proceeds of real estate pooled funds sold and redeemed 21 548Policy loans repaid 1,389 1,689Policy loans advanced (1,192) (1,267)Purchase of property and equipment (918) (713)Proceeds on sale of subsidiary 356 -

(993) 5,738

Decrease in cash and cash equivalents (2,080) (2,630)

Cash and cash equivalents, beginning of year 8,627 11,257

Cash and cash equivalents, end of year $ 6,547 $ 8,627


5

FAITHLIFE FINANCIALNotes to the Financial Statements(In thousands of dollars)

Year ended December 31, 2016

Reporting entity:

FaithLife Financial (the Society) is a fraternal benefit society domiciled in Canada, with a

registered address of 470 Weber Street North, Waterloo, Ontario. The Society is registered

under the Insurance Companies Act (Canada) with the Office of the Superintendent of Financial

Institutions (OSFI). The Society is a Christian-based financial services organization that provides

life insurance, income protection, investment products and fraternal benefits for Canadian

Christians.

2. Basis of preparation:

(a) Statement of compliance:

The financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRS) and its interpretations adopted by the International Accounting

Standards Board (lASS).

The financial statements were authorized for issue by the Board of Directors on February 22,

2017.

(b) Basis of measurement:

The financial statements have been prepared on the historical cost basis except for the

following material items in the statement of financial position:

• financial instruments at fair value through profit or loss are measured at fair value• available-for-sale financial assets are measured at fair value• land and building are measured at fair value• insurance contract liabilities are measured using accepted actuarial practices

The methods used to measure fair values are discussed further in note 3.

(c) Functional and presentation currency:

These financial statements are presented in Canadian dollars, which is the Society’sfunctional currency. All financial information presented in Canadian dollars has beenrounded to the nearest thousand.

(d) Use of estimates and judgments:

The preparation of the financial statements in conformity with IFRS requires management tomake judgments, estimates and assumptions that affect the application of accounting policiesand the reported amounts of assets, liabilities, income and expenses. Actual results maydiffer from these estimates.

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2. Basis of preparation (continued):

(d) Use of estimates and judgments: (continued)

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are recognized in the period in which the estimates are revised and in

any future periods affected.

Information about critical judgments in applying accounting policies that have the most

significant effect on the amounts recognized in the financial statements is included in the

following notes:

• Note 3(b) - valuation of financial instruments• Note 8-valuation of policy liabilities• Note 9-measurement of defined benefit obligations

(e) Liquidity format:

The Society presents its statement of financial position broadly in order of liquidity.Inlomiation on financial assets and financial liabilities expected to be recovered or settled

more than 12 months after the reporting date is included in note 22.

3. Significant accounting policies:

These financial statements have been prepared in accordance with the Insurance Companies

Act, which states that, except as otherwise specified by the Superintendent of FinancialInstitutions Canada, the financial statements are to be prepared in accordance with IERS. Thesignificant accounting policies used in preparing these financial statements, including therequirements of the Superintendent of Financial Institutions Canada, are summarized below.These policies conform, in all material respects, to IFRS.

(a) Basis of accounting:

On May 4, 2016, the Society disposed of its wholly-owned subsidiary, Fl Capital Ltd. As theSociety no longer holds an interest in a subsidiary as at December 31, 2016, the Society haselected to prepare non-consolidated financial statements. The comparative figures havebeen amended to reflect the non-consolidated operating results of FaithLife Financial for theyear ended December 31, 2015, and to record its investment in subsidiary at cost atDecember 31, 2015.

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3. Significant accounting policies (continued):

(b) Financial instruments:

(I) Non-derivative financial assets:

The Society initially recognizes loans and receivables and deposits on the date that they

originated. All other financial assets (including assets designated at fair valve through

profit or loss) are recognized initially on the trade date at which the Society becomes a

party to the contractual provisions of the instrument.

The Society derecognizes a financial asset when the contractual rights to the cash flows

from the asset expire, or it transfers the rights to receive the contractual cash flows on

the financial asset in a transaction in which substantially all the risks and rewards of

ownership of the financial asset are transferred. Any interest in transferred financialassets that is created or retained by the Society is recognized as a separate asset or

liability.

The Society has the following non-derivative financial assets:

Financial assets at fair value through profit or loss:

A financial asset is classified at fair value through profit or loss (FVTPL) if it wasclassified as held1or-trading or is designated as such upon initial recognition. Uponinitial recognition attributable transaction costs are recognized in profit or loss whenincurred. Financial assets at FVTPL are measured at fair value, and changes thereinare recognized in profit or loss.

Available-for-sale financial assets:

Financial assets classified as available-for-sale (AFS) are measured at fair value andchanges therein, other than impairment losses (see note 12(a)(v)), and foreigncurrency differences on AFS monetary items (see note 12(c)(i)), are recognized in

other comprehensive income. When an investment is derecognized, the cumulativegain or loss in surplus is transferred to profit or loss.

Loans and receivables:

Loans and receivables are financial assets with fixed or determinable payments thatare not quoted in an active market. Such assets are recognized initially at fair valueplus any directly attributable transaction costs. Subsequent to initial recognition,loans and receivables are measured at amortized cost using the effective interestmethod, less any impairment losses.

8




(b) Financial instruments (continued):

(i) Non-derivative financial assets (continued):

Loans and receivables comprise insurance and other receivables, mortgage loanson real estate and policy loans.

Cash and cash equivalents are comprised of cash at bank and on hand and short-term deposits. The net carrying value of cash and cash equivalents is equivalent tothe lair value of the assets because of the negligible credit risk and frequent repricing. There are no cash balances held that are not available for use in normaloperations.

(ü) Non-derivative financial liabilities:

Financial liabilities are recognized initially at lair value plus any directly attributable

transaction costs. Subsequent to initial recognition, these financial liabilities aremeasured at amortized cost using the effective interest method.

The Society initially recognizes subordinated liabilities on the date that they originated.All other financial liabilities (including liabilities designated as FVTPL) are recognizedinitially on the trade date at which the Society becomes a party to the contractualprovisions of the instrument.

The Society derecognizes a financial liability when its contractual obligations aredischarged or cancelled or expire.

The Society has the following non-derivative financial liabilities: subordinated debt andexpenses due and accrued.

(c) Portfolio investments:

Portfolio investments are accounted for on the following basis:

(i) Cash and cash equivalents and short-term investments:

Cash and cash equivalents include cash on deposit and short4erm investments withoriginal maturities of less than 90 days. Short-term investments are carried at cost, whichapproximates fair value.

9




(c) Portfolio investments (continued):

(ü) Bonds and debentures:

Investments in bonds and debentures are classified either as AFS or FVTPL.

FVTPL bonds and debentures are recorded at fair value with realized gains and losses

on sale and changes in the fair value of these bonds recorded in net investment income

in the statement of income.

AFS bonds and debentures are recorded at fair value with changes in the fair value of

these bonds recorded in unrealized gains and losses in the statement of comprehensive

income. Realized gains and losses on sale are reclassified from accumulated other

comprehensive income (AOCI) and recorded in net investment income in the statement

of income.

(üi) Stocks:

Investments in stocks are classified either as AFS or FVTPL. FVTPL stocks are recorded

at fair value with realized gains and losses on sale and changes in the fair value of these

stocks recorded in net investment income in the statement of income.

AFS stocks are recorded at fair value with changes in the fair value of these stocks

recorded in unrealized gains and losses in the statement of comprehensive income.

Realized gains and losses on sale are reclassified from accumulated other

comprehensive income (AOCI) and recorded in net investment income in the statement

of income.

(iv) Equity pooled funds:

Equity pooled funds are classified either as AFS or FVTPL. FVTPL equity pooled funds

are recorded at fair value with realized gains and losses on sale and changes in the fair

value of these pooled funds recorded in net investment income in the statement of

income.

AFS equity pooled funds are recorded at fair value with changes in the fair value of these

funds recorded in unrealized gains and losses in the statement of comprehensive

income. Realized gains and losses on sale are reclassified from AOCI and recorded in

net investment income in the statement of income.

10




(c) Portfolio investments (continued):

(v) Mutual funds:

Mutual funds are designated as FVTPL and are carried at market value, and are matched

to the investment portion of Universal Life contracts. Increases or decreases in the

market value of mutual funds are recorded in net investment income in the statement of

income.

(vi) Real estate pooled funds:

Real estate pooled funds are comprised of units in a closed-fund real estate limitedpartnership. Real estate pooled funds are classified either as AFS or FVTPL. FVTPL real

estate pooled funds are recorded at fair value of these units recorded in net investmentincome in the statement of income.

AFS real estate pooled funds are recorded at fair value with changes in the fair value of

these units recorded in unrealized gains and losses in the statement of comprehensive

income. Realized gains and losses on sale are reclassified from ACCI and recorded in

net investment income in the statement of income.

(vii) Mortgage loans on real estate:

Mortgage loans on real estate are classified as loans and receivables and carried atamortized cost, less principal repayments and provisions for significant or prolongeddeclines in value. Gains or losses realized from the sale of mortgage loans on real estateare recorded in net investment income in the statement of income.

(viii) Policy loans:

Policy loans to members are classified as loans and receivables and are carried at theirunpaid balance and are fully secured by the cash surrender value of the policies on whichthe respective loans are made.

(d) Property and equipment:

(i) Recognition and measurement:

Items of property and equipment, including furniture and equipment, leaseholdimprovements, and computer hardware and software, are carried at cost lessaccumulated depreciation and accumulated impairment losses.

11




(d) Property and equipment (continued):

(i) Recognition and measurement (continued):

Items of property and equipment, including land and building, are carried at fair value,

based on triennial valuations by external independent appraisers, less subsequent

depreciation for building. Any accumulated depreciation at the date of revaluation is

eliminated against the gross carrying amount of the asset, and the net amount is restated

to the revalued amount of the asset.

Increases in the carrying amount arising on revaluation of land and building are credited

to the revaluation reserve within surplus. Decreases that offset previous increases of the

same asset are charged against fair value reserves directly in surplus; all other

decreases are charged to the statement of income. Each year, the difference between

depreciation based on the revalued carrying amount of the asset charged to profit or loss

and depreciation based on the asset’s original cost, is transferred from the revaluation

surplus to unappropriated surplus.

Cost includes expenditures that are directly attributable to the acquisition of the asset.

The cost of sell-constructed assets includes the cost of materials and direct labour, any

other costs directly attributable to bringing the assets to a working condition for their

intended use, the costs of dismantling and removing the items and restoring the site on

which they are located, and borrowing costs on qualifying assets for which the

commencement date for capitalization is on or after January 1, 2010.

The cost of replacing a part of an item of property and equipment is recognized in the

carrying amount of the item if it is probable that the future economic benefits embodied

within the part will flow to the Society, and its cost can be measured reliably. The carrying

amount of the replaced part is derecognized. The costs of the day-to-day servicing ofproperty and equipment are recognized in profit or loss as incurred.

When parts of an item of property and equipment have different useful lives, they are

accounted for as separate items (major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment are determined bycomparing the proceeds from disposal with the carrying amount of property andequipment, and are recognized net within other income in profit or loss.

12




(d) Property and equipment (continued):

(ii) Depreciation:

Depreciation is recorded in the profit or loss on a straight-line basis over the estimated

useful lives of the asset. Leased assets are depreciated over the shorter of the lease

term and their useful lives unless it is reasonably certain that the Society will obtain

ownership by the end of the lease term.

The estimated useful lives for the current and comparative periods are as follows:

• Buildings and improvements 40 years

• Furniture and equipment 5 years

• Computer hardware 5 years

• Computer software 3-10 years

Depreciation methods, useful lives and residual values are reviewed at each financial

year end and adjusted, if appropriate.

(hi) Reclassification to investment property:

When the use of a property changes from owner-occupied to investment property, the

property is re-measured to fair value and reclassified as investment property. Any gain

arising on re-measurement is recognized in profit or loss to the extent the gain reverses

a previous impairment loss on the specific property, with any remaining gain recognized

in other comprehensive income and presented in the revaluation reserve in equity. Any

loss is recognized in other comprehensive income and presented in the revaluation

reserve in surplus to the extent that an amount had previously been included in the

revaluation reserve relating to the specific property, with any remaining loss recognized

immediately in profit or loss.

(e) Leased assets:

Leases in terms of which the Society assumes substantially all lhe risks and rewards of

ownership are classified as finance leases. Upon initial recognition the leased asset is

measured at an amount equal to the lower of its fair value and the present value of the

minimum lease payments. Subsequent to initial recognition, the asset is accounted for in

accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognized in the Society’s

statement of financial position.

13




(f) Income taxes:

Income tax expense is comprised of current and deferred tax. Income tax expense is

recognized in profit or loss except to the extent that it relates to items recognized directly in

surplus or in other comprehensive income.

Current income tax is the expected tax payable or receivable on the taxable income or loss

for the year, using tax rates enacted or substantively enacted at the reporting date, and any

adjustment to tax payable in respect of previous years.

Deferred tax is recognized using the balance sheet method, with respect to temporary

differences between the carrying amounts of assets and liabilities for financial reporting

purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax

rates that are expected to be applied to temporary differences when they reverse, based on

the laws that have been enacted or substantively enacted by the reporting date.

(g) Revenue recognition:

(i) Premiums from insurance contracts:

Premium revenues are recognized as they become due.

(ü) Investment income:

Investment income comprises income from financial assets and rental income from

investment property.

Investment income is comprised of interest income on funds invested (including AFS

financial assets), dividend income, gains on the disposal of AES financial assets and

changes in the fair value of financial assets at FVTPL. Interest income is recognized as

it accrues in profit or loss, using the effective interest method.

(h) Insurance contracts:

(i) Classification of insurance contracts:

An insurance contract is a contract under which the Society accepts significant insurance

risk from another party (the policyholder) by agreeing to compensate the policyholder or

other beneficiary if a specified uncertain future event (the insured event) adversely

affects the policyholder or other beneficiaries. Insurance risk is risk other than financial

risk, transferred from the holder of the contract to the issuer

14




(h) Insurance contracts (continued):

(i) Classification of insurance contracts (continued):

Financial risk is the risk of a possible future change in one or more of a specified interest

rate, security price, commodity price, foreign exchange rate, index of prices or rates,credit rating or credit index or other variable, provided in the case of a non-financial

variable that the variable is not specific to a party to the contract. Insurance contracts

may also transfer some financial risk.

Insurance risk is significant if, and only ii, an insured event could cause the Society to

pay significant additional benefits. Once a contract is classified as an insurance contract

it remains classified as an insurance contract until all rights and obligations are

extinguished or expire. Contracts which do not meet the definition of an insurance

contract regardless of their form are classified as either investment contracts or service

contracts, as appropriate.

(ii) Recognition and measurement of insurance contracts:

(a) Premiums:

Premium revenues from insurance policies are recognized as they become due.

(b) Policy liabilities:

Actuarial liabilities have been calculated using accepted actuarial practice which,according to the standards established by the Actuarial Standards Board, is theCanadian Asset Liability Method (CALM). Actuarial liabilities represent an estimateof the amount, which together with future premiums and investment income will besufficient to pay future benefits and expenses on insurance contracts. The carryingvalue of actuarial liabilities is based on the present value of expected cash flows plusprovisions for adverse deviations and is considered to be an indicator of fair value!as there is no ready market for the trading of insurance certificates.

(c) Reinsurance:

The Society cedes reinsurance in the normal course of business for the purpose oflimiting its net loss potential through the transferral of its risks. Reinsurancearrangements do not relieve the Society from its direct obligations to itspolicyholders.

15




(h) Insurance contracts (continued):

(c) Reinsurance (continued):

Reinsurance agreements that give rise to a significant transfer of insurance risk are

accounted for as reinsurance contracts. Amounts recoverable under such contracts

are recognized on the same basis as the related policy liabilities.

Assets, liabilities and income and expenses arising from ceded reinsurance

contracts are presented separately from the related assets, liabilities, income andexpenses from the related insurance contracts because the reinsurance

arrangements do not relieve the Society from its direct obligations to itspolicyholders.

Reinsurance assets include recoveries due from reinsurance companies in respectof policy benefits paid or payable. Amounts recoverable under reinsurance contractsare assessed for impairment at each statement of financial position date. Suchassets are deemed Impaired if there is objective evidence, as a result of an eventthat occurred after its initial recognition, that the Society may not recover all amountsdue and that the event has a reliably measurable impact on the amounts that theSociety will receive from the reinsurer.

(i) Employee future benefits:

(i) Defined benefit plans:

The Society has a registered defined benefit pension plan for head office employees,

which allows voluntary contributions. The Society also provides other benefit plans for

retired employees, including post-retirement health benefits for all employees who retired

on or before March 31, 2015 and supplementary pension benefits for specified retired

executives.

The Society accrues its obligations under employee defined benefit plans and the related

costs, net of plan assets, as the employees render the services necessary to earn the

pension and other employee future benefits. The Society’s net obligation in respect of

defined benefit plans is calculated separately for each plan by estimating the amount of

future benefit that employees have earned in return for their service in the current and

prior periods; that benefit is discounted to determine its present value.

16




(i) Employee future benefits (continued):

(i) Defined benefit plans (continued):

The cast of pensions and other retirement benefits earned by employees is actuariallydetermined using the projected benefit method prorated on service and management’sbest estimate of expected plan investment performance based on assets valued at fair

value, salary escalation, retirement ages of employees and expected health and dental

care costs.

Re-measurements of the net defined benefit liabflity, which comprise actuarial gains andlosses, the return on plan assets (excluding interest) and the effect of the asset ceiling

(if any, excluding interest), are recognized immediately in other comprehensive income(OCI). The Society determines the net interest expense (income) on the net definedbenefit liability (asset) for the period by applying the discount rate used to measure thedefined benefit obligalion al the beginning of the annual period to the then-net definedbenefit liability (asset), taking into account any changes in the net defined benefit liability(asset) during the period as a result of contributions and benefit payments. Net interestexpense and other expense related to defined benefit plans are recognized in profit orloss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting changein benefit that relates to past service or the gain or loss on curtailment is recognizedimmediately in profit or loss. The Society recognizes gains and losses on the settlementof a defined benefit plan when the settlement occurs.

(ü) Termination benefits:

Termination benefits are recognized as an expense when the Society is committed,without realistic possibility of withdrawal, to a formal detailed plan to either terminateemployment before the normal retirement date, or to provide termination benefits as aresult of an offer made to encourage voluntary redundancy. Termination benefits forvoluntary redundancies are recognized as an expense if the Society has made an offerof voluntary redundancy, it is probable that the offer will be accepted, and the number ofacceptances can be estimated reliably. If benefits are payable more than 12 months afterthe reporting period, then they are discounted to their present value.

17




(i) Employee future benefits (continued):

(üi) Defined Contribution Pension Plan:

Effective April 1,2012, the Society implemented a defined contribution (DC) pension plan

which permits active members of the defined benefit (DB) pension plan to convert and

transfer their defined benefit entitlements to their accounts under the DC plan. A member

who joined the DC plan effective April 1, 2012, elected whether to retain their DB

entitlements accrued to April 1, 2012 or transfer the actuarial equivalent value of the DR

entitlements accrued to April 1, 2012 to the DC plan. A member who continues to

participate in the DR plan until December31! 2017, will elect whether to retain his or her

DR entitlements accrued to December31, 2017 or transfer the actuarial equivalent value

of the DR entitlements accrued to December 31, 2017 to the DC plan. All assets of the

DC pension plan are on deposit with! and administered under, an insurance policy issued

by a third party carrier.

0) Impairment:

(i) Financial assets:

A financial asset not carried at FVTPL is assessed at each reporting date to determine

whether there is any objective evidence that it is impaired. A financial asset is considered

to be impaired if objective evidence indicates that one or more events have had a

negative effect on the estimated future cash flows of that asset.

Individually significant financial assets are tested for impairment on an individual basis.The remaining financial assets are assessed collectively in groups that share similarcredit risk characteristics. Objective evidence that financial assets (including equitysecurities) are impaired can include default or delinquency by a debtor! restructuring ofan amount due to the Society on terms that the Society would not consider otherwise,indications that a debtor or issuer will enter bankruptcy, or the disappearance of an activemarket for a security. In addition, for an investment in an equity security, a significant orprolonged decline in its fair value below its cost is objective evidence of impairment.

All impairment losses are recognized in profit or loss. Any cumulative loss in respect ofan AFS financial asset recognized previously in AOCI is transferred to profit or loss.

In assessing collective impairment! the Society uses historical trends of the probability ofdefault, timing of recoveries and the amount of loss incurred, adjusted for management’s

judgment as to whether current economic and credit conditions are such that the actuallosses are likely to be greater or less than suggested by historical trends.

18




U) Impairment (continued):

(I) Financial assets (conlinued):

Impairment losses on AFS investment securities are recognized by transferring the

cumulative loss that has been recognized in AOCI to profit or loss. The cumulative loss

that is removed from AOCI and recognized in profit or loss is the difference between the

acquisition cost, net of any principal repayment and amortization, and the current fair

value, less any impairment loss previously recognized in profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event

occurring after the impairment loss was recognized. For AFS financial assets that are

debt securities, the reversal is recognized in profit or loss. For AFS financial assets that

are equity securities, the reversal is recognized in OCI.

An impairment loss in respect of a financial asset measured at amortized cost is

calculated as the difference between its carrying amount and the present value of the

estimated future cash flows discounted at the assets original effective interest rate.

Losses are recognized in profit or loss and reflected in an allowance account against

receivables. Interest on the impaired asset continues to be recognized through the

unwinding of the discount. When a subsequent event causes the amount of impairment

loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(ii) Non-financial assets:

The carrying amounts of the Society’s non-financial assets, other than investment

property and deferred tax assets, are reviewed at each reporting date to determine

whether there is any indication of impairment. If any such indication exists, then the

asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in

use and its fair value less costs to sell. In assessing value in use, the estimated future

cash flows are discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific to the

asset. For the purpose of impairment testing, assets that cannot be tested individually

are grouped together into the smallest group of assets that generates cash inflows from

continuing use that are largely independent of the cash inflows of other assets or groups

of assets.

An impairment loss is recognized if the carrying amount of an asset exceeds its estimated

recoverable amount. Impairment losses are recognized in profit or loss, Impairment

losses recognized in prior periods are assessed at each reporting date for any indications

that the loss has decreased or no longer exists.

19


Year ended December311 2016


0) Impairment (continued):

(ii) Non-financial assets (continued):

An impairment loss is reversed if there has been a change in the estimates used to

determine the recoverable amount. An impairment loss is reversed only to the extent that

the asset’s carrying amount does not exceed the carrying amount that would have been

determined, net of depreciation or amortization, if no impairment loss had been

recognized.

When title to real estate is acquired under mortgage loan default, an independentappraisal of the property is obtained and expected future cash flows are discounted to

determine estimated net realizable value. If necessary, the carrying value of the propertyis adjusted to net realizable value or the current market value by way of a loss provision.The amount of the provision is recognized in profit or loss.

(k) Provisions:

A provision is recognized if, as a result of a past event, the Society has a present legal or

constructive obligation that can be estimated reliably, and it is probable that an outflow ofeconomic benefits will be required to settle the obligation. Provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflects current marketassessments of the time value of money and the risks specific to the liability. The unwindingof the discount is recognized as a finance cost.

(I) Investment property:

Investment property is property held either to earn rental income or for capital appreciation

or for both, but not for sale in the ordinary course of business, use in the production or supplyof services or for administrative purposes. Investment property is measured at fair value withany change therein recognized in profit or loss. When the use of a property changes suchthat it is reclassified as property and equipment, its fair value at the date of reclassificationbecomes its cost for subsequent accounting.

m) Investment in subsidiary:

The investment in subsidiary is recorded at cost.

20




(n) Accounting standards issued but not yet applied:

The following summarizes future accounting changes that will be relevant to the Society’s

financial statements subsequent to December 31, 2016.

(i) IFRS 4, Insurance Contracts

In February 2016 re-deliberations were completed over the revised exposure draft issued

as part of the project to replace IFRS 4, Insurance Contracts. The forthcoming insurancecontracts Standard is expected to be issued in the first half of 2017, in which case it willbe effective for annual reporting periods beginning on or after January 1, 2021.

On September 12,2016, the IASB issued amendments to IFRS 4, to address accountingmismatches and volatility that may arise in profit or loss in the period between theeffective date of IFRS 9, Financial Instruments, and the forthcoming insurance contractsstandard. The amendments apply in the same period in which a company adopts IERS

9.

The amendments introduce two approaches that may be adopted by insurers in theperiod between the effective date of IFRS 9 and the forthcoming insurance contractsstandard:

• overlay approach — an option for all issuers of insurance contracts to reclassifyamounts between profit or loss and other comprehensive income for eligible financialassets by removing any additional accounting volatility that may arise from applyingIFRS 9; and

• temporary exemption — an optional temporary exemption from IFRS 9 for companieswhose activities are predominately connected with insurance. This exemption allowsan entity to continue to apply existing financial instrument requirements in lAS 39 toall financial assets until the earlier of the application of the forthcoming contractsStandard; or January 1,2021.

In December 2015, the Office of the Superintendent of Financial Institutions (OSFI)issued a draft advisory articulating its expectation that life insurers whose activities arepredominantly connected with insurance to apply the temporary exemption from IFRS 9in annual periods beginning before January 1,2021.

The Society intends to adopt the amendments to IFRS 4 in its financial statements forthe annual period beginning on January 1, 2018. The extent of the impact of adoption ofthe amendments has not yet been determined.

21




(ii) IFRS 9, Financial Instruments

On July 24, 2014 the IASB issued the complete amended IFRS 9. The mandatoryeffective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and

must be applied retrospectively with some exemptions. Early adoption is permitted. The

restatement of prior periods is not required and is only permitted if information is available

without the use of hindsight.

IFRS 9 introduces new requirements for the classification and measurement of financial

assets based on the business model in which they are held and the characteristics of

their contractual cash flows. It also amends the impairment model by introducing a new

‘expected credit loss’ model for calculating impairment.

The standard also introduces additional changes relating to financial liabilities.

The Society is required to adopt IFRS 9 in its financial statements for the annual periodbeginning on January 1, 2018, unless it adopts the temporary exemption described

previously. It is expected that IFRS 9 will have a significant impact on classification andmeasurement of financial assets, however, the Society is not able to estimate reasonably

the impact that IFRS 9 will have on the financial statements.

(ill) IFRS 15 Revenue from Contracts with Customers:

On May 28, 2014, the IASB issued IFRS 15, Revenue 1mm Contracts with Customers,

effective for annual periods beginning on or after January 1,2018. The standard contractis a single model that applies to contracts with customers based on a five-step analysisof the transaction to determine whether, how much and when revenue is recognized.The new standard does not apply to revenue from insurance contracts or investmentincome. The financial reporting impact of adopting IFRS 15 is being assessed.

(iv) IFRS 16 Leases:

On January 13, 2016, the IASB issued IFRS 16, Leases, effective for annual periodsbeginning on or after January 1, 2019. This standard introduces a single lesseeaccounting model and requires a lessee to recognize assets and liabilities for all leaseswith a term of more than 12 months, unless the underlying asset is of low value. A lesseeis required to recognize a right-of-use asset representing its right to use the underlyingasset and a lease liability representing its obligation to make lease payments. Thefinancial reporting impact of adopting IFPS 16 is being assessed.

22



4. Portfolio investments:

The Society utilizes the prudent person approach to asset management, as outlined by the

Insurance Companies Act. Investment policies are in place and are monitored by the Board of

Directors. Policies are in place encompassing various guidelines and restrictions, in addition to

limiting the investment exposure to any one entity or group of related entities, to managing

concentration risk of investments in any one industry sector or any specific geographic area and

to defining limitations on the credit quality of investments. Investment assets supporting policy

liabilities are chosen such that their amount and cash flow characteristics consider policy liability

cash flows and duration. Changes in the fair values of assets supporting liabilities will be offset

mainly by changes in the fair value of those liabilities.

a) Portfolio values:

2016 FVTPL AFS Other Total

Cash and cash equivalents $ - $ - $ 6547 $ 6,547

Bonds and debentures:Federal 4,870 - - 4,870Provincial 50,398 - - 50,398Municipal 37,220 - - 37,220Corporate A or higher 64,390 - - 64,390Corporate belowA 15,668 - - 15,668

172,546 - - 172,546

Stocks 13,460 14,759 - 28,219Equity pooled funds 7,336 2,567 - 9,903Mutual funds 1,131 - - 1,131Mortgage loans on real estate - - 65,647 65,647Investment property - - 3,963 3,963

$ 194,473 $ 17,326 $ 76,157 $ 287,956

23



4. Portfolio investments (continued):

a) Portfolio values (continued):


Cash and cash equivalents $ - $ - $ 8,627 $ 8,627

Bonds and debentures:Federal 4,124 - - 4,124Provincial 48,394 - - 48394Municipal 36,292 - - 36292CorporateAor higher 76,183 - - 76,183CorporatebelowA 11,197 - - 11,197

176,190 - - 176,190

Stocks 9.300 14241 - 23,541Equity pooled funds - 6,548 - 6,548Mutual funds 1,054 - - 1,054Real estate pooled funds - 21 - 21Mortgage loans on real estate - - 68,706 68,706Investment property - - 4,044 4,044

$ 186,544 $ 20,810 $ 81,377 $ 288,731

Provisions for significant or prolonged declines in value totalled $101 (2015- $682).

Geographic concentration - mortgage loans on real estate and investment property:

2016 2015

Mortgage loans on real estate:Ontario $ 36,315 $ 40,565Manitoba 4,051 2,128Saskatchewan 422 492Alberta 17,797 16519British Columbia 6,763 8679New Brunswick 299 323

Less loss provision - -

$ 65,647 $ 68,706

Investment property:Ontario $ 3,963 $ 4044

(b)

(c)

24




(d) Fair value information:

(I) Fair value versus carrying values:

The fair values of financial assets and liabilities, together with the carrying amounts

shown in the statement of financial position, are as follows:

2016 Carrying amount Fair value

Assets carried at fair value:Fair value through profit or loss $ 194,473 $ 194,473Available-for-sale 17,326 17,326

Assets carried at amortized cost:Cash and cash equivalents 6,547 6,547Insurance and other receivables 639 639Mortgage loans on real estate 65,647 66,311Policy loans 10,662 10,662

S 295,294 $ 295,958

Liabilities carried at amortized cost:Expenses due and accrued $ 668 $ 668Subordinated debt 4,282 4,834

$ 4,950 $ 5,502

2015 Carrying amount Fair value

Assets carried at fair value:Fair value through profit or loss $ 186,544 $ 186,544Available-for-sale 20,810 20,810

Assets carried at amortized cost:Cash and cash equivalents 8,627 8,627Insurance and other receivables 2,986 2,986Mortgage loans on real estate 68,706 70,035Policy loans 10,859 10,859

$ 298,532 $ 299,861

Liabilities carried at amortized cost:Expenses due and accrued $ 941 $ 941Subordinated debt 4,417 5,077

S 5,358 $ 6,018

25




(d) Fair value information (continued):

(i) Interest rates used for determining fair value:

The interest rates used to discount estimated cash flows, when applicable, are based on

the government yield curve at the reporting date plus an adequate credit spread, and are

as follows:

2016 2015

Insurance and other receivables, policy loansand expenses due and accrued - % - %

Mortgage loans on real estate 281% - 416% 2.68% - 418%Subordinated debt 5.70% 5.40%

(ii) Fair value hierarchy analysis:

The table below provides an analysis of the basis of measurement used to fair value

financial instruments carried at fair value, categorized by the following fair value

hierarchy:

Level 1: quoted prices (unadjusted) in active markets for identical assets

Level 2: inputs other than quoted prices included within Level 1 that are

observable for the asset either directly (i.e., as prices) or indirectly (i.e.,

derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market

data (unobservable inputs)

2016 Level 1 Level 2 Level 3 Total

Fair value through profit or loss:Equityinvestments $ 21,927 $ - $ - $ 21,927Debt investments - 172,546 - 172546

Available-for-sale:Equity investments 14,759 2,567 - 17,326Debt investments - - - -

$ 36,686 $ 175,113 $ - $ 211,799

Segregated funds assets $ 103,877 S - $ - S 103877

26




(I) Fair value hierarchy analysis:

2015 Level 1 Level 2 Level 3 Total

Fair value through profit or loss:Equity investments $ 10,354 $ - $ - $ 10,354Debt investments - 176,190 - 176,190

Available-for-sale:Equity investments 18,037 2,773 - 20,610Debt investments - - - -

$ 28,391 $ 178,963 $ - $ 207354

Segregated funds assets $ 101,439 $ - $ - $ 101,439

The level in the fair value hierarchy within which the fair value measurement is

categorized in its entirety is determined based on the lowest level input that is significant

to the fair value measurement in its entirety.

There were no transfers between Level 1 and Level 2 for the years ended December31,

2016 and December 31, 2015. There were no Level 3 investments for the years ended

December 31, 2016 and 2015.

5. Cash and cash equivalents:

2016 2015

Bank and cash balances $ 6,407 $ 4,628Short-term investments 140 3,999

Cash and cash equivalents $ 6,547 $ 8,627

The effective interest rate on short term investments at statement of financial position date is

0.83% (2015— 0.83%), with an average maturity of 68 days (2015- 15 days).

27

FAITHLIFE FINANCIALNotes to the Financial Statements(in thousands of dollars)


6. Insurance and other receivables:

2016 2015

Contractholders $ 98 $ 166

Other receivables 541 2,820

$ 639 $ 2,986

Insurance and other receivables are shown net of impairment losses. Impairment losses

recognized in the current year amount to $nil (2015- Snil).

The estimated fair value of insurance and other receivables, excluding prepayments, is $639

(2015- $2986). All of the insurance and other receivables! including prepayments, are expected

to be settled no more than twelve months after the statement of financial position date.

7. Property and equipment:

Buildingsand Furniture Computer

leasehold and software andLand improvements equipment equipment Total

Fair value or cost:Balance, December31, 2015 $ 1,288 $ 3325 $ 1,125 $ 10,989 $ 16,727

Additions - 9 22 889 920Balance, December31! 2016 $ 1,288 $ 3:334 $ 1,147 $ 11,878 $ 17,647

Accumulated amortization:Balance, December 31, 2015 $ - $ 309 $ 1,040 $ 3,634 $ 4,983

Amortization for the year - 91 18 1082 1,191Balance. December31, 2016 $ - $ 400 $ 1,058 $ 4,716 $ 6,174

Net book value:Balance, December31. 2015 $ 1,288 $ 3,016 $ 85 $ 7,355 $ 11,744Balance, December31, 2016 $ 1,288 $ 2,934 $ 89 $ 7,182 $ 11,473

28



8. Policy liabilities and reinsurance assets:

2016 Gross Reinsurance Net

Participating:Lire $ 171,643 $ (205) S 171,848Health 3,424 1,555 1,869

Annuity 69,282 1,105 68,177

S 244,349 $ 2,455 $ 241,894

2015 Gross Reinsurance Net

Participating:Life $ 168,209 $ (3,398) $ 171,607

Health 3,206 1,486 1,720Annuity 73,854 1,333 72,521

S 245,269 $ (579) $ 245,848

(a) Nature of policy liabilities:

Policy liabilities represent an estimate of the amounts which, together with estimated future

premiums and investment income, will be sufficient to pay estimated future benefits,

dividends and expenses on all insurance and annuity policies in force. The calculation of

policy liabilities involves the use of estimates concerning such factors as mortality and

morbidity rates, future investment yields, future expense levels and rates of surrender. Policy

liabilities are determined using generally accepted actuarial practices, according to standards

established by the Actuarial Standards Board, which prescribes the use of the Canadian

Asset Liability Method.

(b) Assumptions:

In the computation of policy liabilities, best estimate assumptions covering the lifetime of the

policies are made. These assumptions may be subject to change in the future. Actual

experience is monitored regularly to ensure that the assumptions remain appropriate. Any

change in policy liabilities resulting from assumption revisions is recognized in income

immediately. The methods for arriving at the most significant assumptions are outlined

below:

29



8. Policy liabilities and reinsurance assets (continued):

(b) Assumptions (continued):

(i) Mortality:

The mortality assumption for individual life insurance is based on a combination of

Society and industry experience. For annuities, the mortality assumption is based upon

industry mortality experience and has been projected forward to allow for continuing

mortality improvement to the extent permitted by generally accepted actuarial standards.

(h) Morbidity:

Morbidity assumptions are made with respect to the rates of claim incidence and

recovery. These assumptions are based on industry-expected experience.

(hi) Investment returns:

The Society maintains asset segments backing specific lines of business. For each

segment, future investment yields are based upon projected future cash flows and

expected future reinvestment rates derived from the current economic outlook and the

Society’s investment policy.

(iv) Expenses:

Operating expense assumptions reflect the projected cost of maintaining and servicing

in-force policies and associated overhead expenses. These expenses are derived from

the Society’s internal cost studies with future expenses adjusted for inflation.

(v) Policy termination:

Policy termination assumptions are based on the Society’s experience adjusted for

expected future conditions. The assumptions reflect differences in termination patterns

for different types of contracts.

(c) Provision for adverse deviation:

The basic assumptions made in establishing actuarial liabilities are best estimates for a range

of possible outcomes. To recognize the uncertainty in establishing these best estimate

assumptions! to allow for possible deterioration in experience and to provide greater comfort

that the policy liabilities are adequate to pay future benefits, the appointed actuary is required

to include a margin in each assumption.

30




(c) Provision for adverse deviation (continued):

The impact of these margins is to increase actuarial liabilities and decrease the income that

would be recognized at the inception of a policy. Minimum conditions are prescribed by the

Canadian Institute of Actuaries for determining margins related to interest rate risk. For other

risks, which are not specifically addressed by the Canadian Institute of Actuaries, a range is

defined as 5% to 20% of the expected experience assumption, taking into account the risk

profiles of the business. The Society uses margin assumptions near the middle of the

permissible ranges.

(d) Changes in policy liabilities:

Policy liabilities will experience a normal change each year reflecting premiums received,

investment income, benefit payments and expenses. Policy liabilities may also change due

to changes in the methods or assumptions from which they are calculated. The Society’s

recent mortality, investment income, expenses, taxes and policy termination rates were

reviewed and used to update the assumptions for future experience. In addition, refinements

were implemented to the calculation of policy liabilities for certain benefits.

As a result of these activities, policy liabilities changed as follows:

2016 2015

Policy liabilities, beginning of year $ 245,269 5 256,676

Normal changes due to operations (37) (3.507)Changes in policy liability assumptions (883) (7,900)Change in policy liabilities (920) (11,407)

Policy liabilities, end of year $ 244,349 $ 245,269

The changes in assumptions and their impact on policy liabilities were:

2016 2015

Refinements in calculations $ 355 $ (629)Mortality 3,781 (3,266)Interest rates/dividends (8,086) (6,711)Expenses/taxes (1,836) (119)Lapse 4,903 2,825

5 (883) $ (7,900)

31




(e) Assets supporting liabilities (continued):

The Society manages assets, liabilities and surplus within major categories! depending on

the investment objectives that are appropriate for each category. The distribution of net

assets within each category is as follows:

2016 Insurance Annuities Corporate Surplus Total

Cash and cash equivalents $ 692 $ 1,232 $ 4,582 $ 41 $ 6,547Accrued investment income 4 - 19 2054 2,077Bonds and debentures 151,813 12,722 2,655 5,356 172,546Stocks and other equity funds 12,680 8,138 5558 12,877 39,253Mortgage loans on real estate 18,532 44,700 437 1,978 65,647Reinsurance recoverable 1,350 1,105 - - 2,455Policy loans 10,623 39 - - 10,662Segregated fund assets - 103,877 - - 103,877Investment property - - - 3,963 3,963Property and equipment - - - 1 1 473 1 1,473Other - - - 1,381 1,381

Total assets $ 195,694 $ 171,813 $ 13,251 $ 39,123 $ 419,881

2015 Insurance Annuities Corporate Surplus Total

Cash and cash equivalents $ 996 $ 7,002 $ 629 $ - $ 8,627Accrued investment income 504 - 1,700 - 2,204Bonds and debentures 159,686 12,923 3,581 - 176,190Stocks and otherequityfunds 5,727 4,261 3,548 17,628 31,164Mortgage loans on real estate 17,579 47,053 4,074 - 68,706Reinsurance recoverable (1,912) 1,333 - - (579)Policy loans 10,822 37 - - 10,859Segregated fund assets - 101,439 - - 101,439Investment property - - - 4,044 4,044Property and equipment - - - 11,744 11,744Other - - - 4,044 4,044

Total assets $ 193,402 $ 174,048 $ 13,532 $ 37,460 $ 418,442

32




(U Fair values:

Assets are chosen for their amount and cash flow characteristics to match policy liability cash

flows. Consequently, changes in the fair values of assets supporting liabilities will be offset

mainly by changes in the fair values of those liabilities. Changes in the fair values of assets

backing surplus, less related income taxes, result in a corresponding change in surplus when

realized.

Assets supporting2016 liabilities Total assets

Carrying Fair Carrying Fairvalue value value value

Cash and cash equivalents $ 6,506 $ 6,506 $ 6,547 $ 6,547Accrued investment income 23 23 2,077 2,077Bonds and debentures 167,190 167,190 172,546 172,546Stocks and other equity funds 26,376 26,376 39,253 39,253Mortgage loans on real estate 63,669 64,313 65,647 66,311Reinsurance recoverable 2,455 2,455 2,455 2,455Policy loans 10,662 10,662 10,662 10,662Segregated fund assets 103,877 103,877 103,877 103,877Investment property - - 3,963 3,963Property and equipment - - 11,473 11,473Other - - 1,381 1,381

Total assets $ 380,758 $ 381,402 $ 419,881 $ 420,545

Assets supporting2015 liabilities Total assets

Carrying Fair Carrying Fairvalue value value value

Cash and cash equivalents $ 8,206 $ 8,206 $ 8,627 $ 8,627Accrued investment income 2,204 2,204 2,204 2,204Bonds and debentures 176,190 176,190 176,190 176,190Stocks and other equity funds 13,536 13,536 31,164 31,164Mortgage loans on real estate 68,706 70,035 68,706 70,035Reinsurance recoverable (579) (579) (579) (579)Policy loans 10,859 10,859 10,859 10,859Segregated fund assets 101,439 101,439 101,439 101,439Investment property - - 4,044 4,044Property and equipment - - 11,744 11,744Other - - 4,044 4,044

Total assets $ 380,561$ 381,890 $ 418,442 $ 419,771

33



9. Registered pension plan and other benefit plans:

Included in other liabilities is the accrued benefit liability attributable to the Society’s defined

benefit pension plan, supplemental retirement arrangement (SRA”) and other post-employment

health benefits. Details of the plan are as follows:

(a) Pension plan:

(i) Plan provisions:

FaithLife Financial maintains a Pension Plan which has a defined benefit and a defined

contribution component.

Retirement benefits under the defined benefit component are based on the length of

pensionable service and on the average of 60 consecutive months’ earnings that gives

the highest average. The Pension Plan allows voluntary contributions effective January

1, 1991. Members may contribute up to 4% of the portion of salary above the Year’sMaximum Pensionable Earnings (YMPE) into the employee’s Money Purchase Account,

with 75 percent of the employee contributions being matched by the employer and

accumulated in the employer’s Money Purchase Account. For an employee who was a

member as of December 31, 1990, the pension for post 1990 service is subject to a

minimum pension amount based on the past service pension formula and the level of

accumulated voluntary contributions.

Retirement benefits under the defined contribution component are calculated from the

contributions to the plan based on a percentage of each employee’s pensionable

earnings, voluntary contributions by employees and the investment income earned on

those contributions. The assets of the plan are held separately from those of the Society

in funds under control of the trustees.

(U) Regulatory framework:

The Pension Plan is registered under the Pension Benefits Act of Ontario and with the

Canada Rcvenue Agency.

Under the Pension Benefits Act of Ontario, the employer is required to makecontributions to fully finance the defined benefit plan over a period of time, in order to

constitute the benefits as defined by the plan provisions. The value of these benefits isdetermined in actuarial valuations at least once every three years or on an annual basis

if the market value of assets does not exceed 85% of the liability on the solvency basis.

34



9. Registered pension plan and other benefit plans (continued):

(a) Pension plan (continued):

(ü) Regulatory framework (continued):

According to the most recent actuarial valuation for funding purposes as at January 1

2014, the plan has a shortfall on both the going-concern and solvency basis. Thus, the

employer is required to contribute the minimum amortization payment in addition to the

residual normal cost, as shown below.

The minimum annual amortization payment is the amount required to fund the shortfall

over the periods shown below.

January 1 2015 to December 31, 2018 $ 95

January 1, 2019 to December 31, 2026 $ 2

The Income Tax Act restricts employer contributions to the defined benefit plan if the

assets exceed 125% of the liabilities on the going-concern basis. Any surplus in excess

of 25% of the liabilities must be used by the employer to take a contribution holiday or

may be used to grant benefit improvements.

According to the plan provisions, the employer may use surplus to take a contribution

holiday or to satisfy employer service cost requirements under the Pension Plan.

(iii) Plan governance:

In accordance with the Pension Benefits Act of Ontario and the Income Tax Act, FaithLife

Financial is the administrator of the plan and is ultimately responsible for all aspects of

the plan, including administration, financial management, oversight and compliance with

legislative requirements and plan documents. Some of the duties for which theadministrator is responsible have been delegated, where appropriate, to a pension

committee or third-party advisors. The administrator, directly or with delegates, has a

duty to apply the knowledge and skills needed lo meet governance responsibilities with

respect to the plan.

(üi) Funding arrangement and funding policy:

FaithLife Financial has adopted a funding practice to make the minimum requiredcontributions as required by law or such greater amount as the Employer may deem

appropriate.

35




(b) Supplemental retirement arrangement:

FaithLife Financial maintains a SPA for Designated Executive Employees of FaithLifeFinancial under various agreements signed with each member. The SPA provides pension

benefits that top up the defined benefit pension under the FaithLife Financial Pension Plan.

The SPA is not registered with any of the provincial or federal pension benefits acts. Thebenefits in this arrangement are not pre-funded. Future payments for current retirees aresecured by Letters of Credit established by the Employer

(c) Other benefits plan:

FaithLife Financial maintains the Benefits Plan which provides post-retirement benefitscoverage (health, dental and life insurance) on a covered employee’s retirement. TheBenefits Plan has been closed to new hires. All employees who retired prior to March 31,2016 are eligible for post-retirement benefits. The Benefits Plan is not registered under anyof the provincial or federal pension benefits acts. The benefits in this arrangement are notpre-funded.

(d) Defined benefit plan risks:

Risks associated with this plan are similar to those of typical defined benefit plans, includingmarket risk, interest rate risk, liquidity risk, credit risk, currency risk, longevity risk, etc. Thereare no significant risks associated with this plan that could be deemed unusual or requirespecial disclosure.

The interest rate sensitivity of the defined benefit obligation can be measured using duration.The duration also provides information on the maturity profile of the obligation. The durationof the defined benefIt obligation as at December 31, 2016 is 16.3 years for the pension planand 11.7 years for the supplemental and post-retirement plans.

The fair value of plan assets for the Society’s pension plan is as follows:

2016 2015Amount Percent Amount Percent

Cash $ - -% $ 93 11%Fixed income funds 3,826 48.6% 2,652 32.3%Mortgage funds 774 9.8% - -Equity funds 3,278 41.8% 5,460 66.6%

$ 7,878 100% $ 8,205 100.0%

36




Information about the Society’s registered pension plan and other benefit plans is as follows:

Registered pension plan Other benefit plans2016 2015 2016 2015

Defined benefit obligation S 9,861 $ 10,241 S 6,642 $ 6,555Fair value of plan assets 7,878 8,205 - -

Funded status - plan deficit $ 1,983 $ 2,036 $ 6,642 $ 6,555

Accrued benefit liability $ 1,983 $ 2,036 $ 6,642 $ 6,555

In the past, the Society has periodically provided increases in registered pension benefits paid to

retirees, commonly referred to as ‘indexing” to reflect inflation levels. Such indexing increases

are discretionary. They are not contractual or obligatory, either in amount or frequency. The

accrued benefit obligation for the registered pension plan has been calculated assuming no future

indexing.

The supplemental pension obligation to retired and current executives is an integral part of the

compensation plan for these individuals. Payments to retired executives are contractual. Future

payments to current executives are contingent on their meeting certain service and vesting

requirements.

The current and potential future obligation is unfunded. In connection with this arrangement, the

Society has acquired a Letter of Credit from a financial institution to secure the future required

payments to current retirees. The Letter of Credit has a face value of $3,400 (2015 - $3,600)

and is secured by investment grade provincial bonds.

Accrued benefit liabilities are included in other liabilities on the statement of financial position. Of

the accrued liability of $6,642 (2015 -$6,555) for other benefit plans, $2,137 (2015 -$2,011) isfor post-retirement health benefits, and $4,505 (2015- $4,544) is for current and potential future

supplemental pension obligations to retired and current executives.

37




The significant actuarial assumptions adopted in measuring the Society’s accrued benefit

obligations are as follows (weighted average assumptions as of December 31):


Measurement date December31 December31Effective date of last actuarial

valuation January 1,2014 January 1,2014Date of next required actuarial

valuation for funding purposes January 1,2017 January 1, 2017

Discount rate, beginning of year 4.00% 475% 400% 475%Discount rate, end of year 400% 400% 4.00% 400%Rate of compensation increase 4.00% 4.00%Annual inflation indexing factor 0.00% 0.00% — —

Health care trend rate assumed 100% gradually 6.75% graduallyreducing to reducing to

5.00% in 2028 5.00% in 2022and thereafter and thereafter

Effect of 1% increase in trendrate on:

Health care benefit cost $8 $8Accrued benefit obligation $208 $202

Effect of 1% decrease in trendrate on:

Health care benefit cost(decrease) — — $(7) 5(7)

Accrued benefit obligation(decrease) — — $(176) 5(167)

Dental care trend rate assumed 4 0% 350%Effect of 1% increase in trend rate on:

Dental care benefit cost $2 $3Accrued benefit obligation $49 $76

Effect of 1% decrease in trendrate on:

Dental care benefit cost(decrease) — $(2) $(2)

Accrued benefit obligation(decrease) — — 5(42) $(67)

38




Sensitivity analysis:

Reasonable possible changes as the reporting date to one of the relevant actuarial assumptions,

holding other assumptions constant, would have affected the defined benefit obligation by the

amounts shown below:

Pension Plan:

Discount rate: 3.75% (instead of 400%) $ 383

Discount rate: 4.25% (instead of 4.00%) (374)

SaIaryNMPE Growth: 3.75%/3.25% (instead of 4.00%/3.50%) (95)

SalaryNMPE Growth: 4.25%13.75% (instead of 4.00%/350%) 98

Post-Retirement Plan:

The sensitivity analysis of the Post-Retirement Plan at December 31,2016 for a 1% increase and

decrease in health and dental claims cost trend rates is as follows:

1% Increase 1% Decrease

Current service and interest cost impact - for 2016 $ 10 $ (8)Defined benefit obligation impact - December 31, 2016 257 (218)

39




Other information about the Society’s benefit plans is as follows:


Accrued benefit obligation,beginning of year $ 10,241 $ 10:396 $ 6,555 $ 6,704

Current service cost, inclusive ofemployee contributions 305 327 44 58

Interest cost 400 412 256 262Benefits paid (1,085) (839) (398) (385)Actuarial loss (gain) - (55) 185 (84)Accrued benefit obligation, end of year $ 9861 $ 10,241 $ 6.642 $ 6.555

Fair value of plan assets,beginning of year $ 8,205 $ 8,902 $ - $ -

Expected return on plan assets 314 347 - -

Employee contributions 28 33 - -

Employer contributions 327 361 398 385Benefits paid (1,085) (839) (398) (385)Actuarial (loss) gain 227 (510) . -

Administration cost (138) (89) -

Fair value of plan assets, end of year $ 7,878 $ 8,205 $ - $ -

Current service cost $ 277 $ 294 $ 44 $ 58Administration cost 138 89 - -

Interest cost 400 412 256 262Expected return on plan assets (314) (347) - -

Net benefit plan expense $ 501 $ 448 $ 300 $ 320

Of the net benefit plan expense of $300 (2015 -$320) for other benefit plans, expense of $78

(2015 - $62) is for post-retirement health benefits and $222 (2015 - $238) is for current and

potential supplemental pension obligations to retired and current executives.

The cost recognized for the Society’s defined contribution plan is $178 (2015 - $156). These

amounts are not included in the cost recognized for the defined benefit plan above.

40

FAITHLIFE FINANCIALNotes to the Financial Statements(In thousands of doJars)


10. Subordinated debt:

Subordinated debt consists of the following:

2016 2015Carrying Fair Carrying Fair

value value value value

Subordinated loan, dueDecember24, 2023, unsecured $ 4,282 $ 4,834 $ 4,417 $ 5,077

During the fourth quarter of 2008, the Society issued USD $4,000 in subordinated debt. The

subordinated debt is redeemable by the Society at the principal amount plus any accrued and

unpaid interest at anytime, and during the fourth quarter of 2009, and the fourth quarter of 2010

redemptions of USD $300 and USD $500 took place. The carrying value has been converted to

Canadian currency at the prevailing exchange rate as of the statement of financial position date.

The subordinated debt bore an annual interest rate of 6.75% until December 24, 2013. After

December 24, 2013 and for the remainder of the term, it bears interest at the rate of 7.75%. The

fair value of the subordinated debt is estimated based on the present value of future cash flowsdiscounted at current market rates of interest for debt of similar term and quality.

11. Surplus and capital management:

The Society monitors the amount of its capital available. The amount of capital deployed is

dependent upon regulatory requirements as well as the Society’s internal assessment of capitalrequirements in the context of its operational risks and requirements, and strategic plans. TheSociety’s practice is to maintain capitalization at a level that will exceed the relevant minimumregulatory capital requirements and the Society’s internal target capital levels.

In Canada, OSFI has established a capital adequacy measurement for life insurance companies

incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as theMinimum Continuing Capital and Surplus Requirements (MCCSR). OSFI generally expects lifeinsurance companies to maintain a minimum total MCCSR ratio of 150% or greater, based on

the risk profile of the relevant insurance company. The Society has established its own internaltarget capital ratios of 190% of MCCSR for total capital and 125% of MCCSR for Tier 1 capital,based on results from its Own Risk and Solvency Assessment (ORSA).

41



11. Surplus and capital management (continued):

The prime purposes of the ORSA report are to identify and assess the Society’s material risks,

as well as to determine an adequate amount of capital and its internal capital targets, so as to

ensure the appropriateness of its risk management and of its current and likely future capital

needs and solvency positions.

The following table provides the capital and MCCSR information and ratios for the Society:

2016 2015

Capital Available:

Tier 1 Capital $ 25,930 $ 26542

Tier 2 Capital 16,225 14,539

Total Tier 1 and Tier 2 Capital 42,155 41,081

Total Capital Required 17,004 18781

MCCSR ratios:

Tier 1 ratio 152% 141%

Total ratio 248% 219%

The Society has also established policies and procedures designed to identify, measure and

report all material risks, as detailed in its ORSA report. Management is responsible for

establishing capital management procedures for implementing and monitoring the capital plan.

The Board of Directors reviews and approves the capital policy of the Society.

The Society’s capital base is structured to exceed regulatory and internal capital targets while

maintaining a capital efficient structure and desired capital ratios. Capital is managed on a basis

under principles that consider all the risks associated with the business. The Society’s capital

base includes surplus and the subordinated debt referenced in note 10.

Appropriated surplus represents a discretionary amount appropriated by the Board of Directors

to provide for possible future fraternal benefits and activities.

The Society’s capital adequacy is monitored through the Report on Dynamic Capital Adequacy

Testing (DCAT). The purpose of the DCAT report is to bring the attention of the Board of

Directors to plausible threats to the Society’s solvency and to actions which can be taken to

lessen the likelihood of those threats or to offset the effects if a threat should it materialize. The

report is prepared and reported to the Board of Directors annually.

42

FAITHLIFE FINANCIALNotes to the Financial Statements(In thousands of doflars)


12. Financial risk management:

The primary goals of the Society’s financial risk management are to ensure that the outcomes of

activities involving elements of risk are consistent with the Society’s objectives and risk tolerance,

and to maintain an appropriate risk/reward balance while protecting the Society’s statement of

financial position from events that have the potential to materially impair its financial strength.

Balancing risk and reward is achieved through aligning risk appetite with business strategy,

diversifying risk, pricing appropriately for risk, mitigating risk through preventive controls and

transferring risk to third parties.

The Society has policies relating to the identification, measurement, monitoring, mitigating, and

controlling of risks associated with financial instruments. The key risks related to financial

instruments are credit risk, liquidity risk, market risk, insurance risk and operational risk. The

following sections describe how the Society manages each of these risks:

(a) Credit risk:

Credit risk is the risk of financial loss resulting from the failure of debtors making payments

when due. The Society is exposed to credit risk principally through its investment securities

and balances receivable from policyholders and reinsurers. The following policies and

procedures are in place to manage this risk:

• Investment guidelines are in place that require only the purchase of investment-

grade assets and minimize undue concentration of assets in any single geographic

area within Canada, as well as industry and company.

• Investment guidelines specify minimum and maximum limits for each asset class.

Credit ratings are determined by recognized external credit rating agencies and/or

internal credit review.

• Investment guidelines also specify collateral requirements.

• Portfolios are monitored continuously, and reviewed regularly with the Board of

Directors and the Investment Management Committee of the Society.

• Significant restrictions have been placed around the use of derivative instruments.

Such instruments may be used only for hedging purposes, not for speculation, and

counterparty credit risk must be mitigated by the use of exchange-traded

instruments only.

The Society is exposed to credit risk relating to premiums due from policyholders during the

grace period specified by the insurance policy or until the policy is paid up or terminated.

Commissions paid to agents and brokers are netted against amounts receivable, if any.

43



12. Financial risk management (continued):

(a) Credit risk (continued):

Reinsurance is placed with counterparties that have a good credit rating and concentration

of credit risk is managed by following policy guidelines set each year by the Board of

Directors. Management continuously monitors and performs an assessment of

creditworthiness of reinsurers.

(i) Maximum exposure to credit risk:

The following table summarizes the Society’s maximum exposure to credit risk related

to financial instruments. The maximum credit exposure is the carrying value of the asset

net of any allowances for losses:

2016 2015

Cash and cash equivalents $ 6,547 $ 8,627Accrued investment income 2,077 2,204Insurance and other receivables 639 2,986Bonds and debentures 172,546 176,190Mortgage loans on real estate 65,647 68,706Reinsurance recoverable 2,455 -

$ 249.911 $ 258,713

Credit risk is also mitigated by requiring collateral in certain circumstances. The amount

and type of collateral required depends on an assessment of the credit risk of the

counterparty.

Guidelines are implemented regarding the acceptability of types of collateral and the

valuation parameters. Management monitors the value of the collateral, requests

additional collateral when needed and performs an impairment valuation when

applicable.

(ü) Concentration of credit risk:

Concentrations of credit risk arise from exposures to a single deblor, a group of related

debtors or groups of debtors that have similar credit risk characteristics in that they

operate in the same geographic region or in similar industries. The characteristics are

similar in that changes in economic or political environments may impact their ability to

meet obligations as they come due.

44





(ü) Concentration of credit risk (continued):

The following table provides details of the carrying value of bonds by industry sector and

geographic distribution:

2016 2015

Canadian bonds issued or guaranteed by:Canadian federal government $ 4870 $ 4,124Canadian provincial and municipal governments 87,618 84,686

Corporate bonds by sector:Infrastructure/Utilities 35,836 28,403Energy 20,296 11,101Financial services 13,645 22,035Industrials 7,030 20,562Real estate 1,679 -

Telecommunications 1,572 2,654Health care - 1,445Consumer discretionary - 873Consumer staples - 307

$ 172,546 $ 176,190

Terms to maturities of bonds:

2016 2015

Due in 1 year or less $ 1,598 S 1,520Due in 1 to 5 years 20,595 21,684Due inS to 10 years 16,722 16,909Due after 10 years 133,631 136,077

$ 172,546 $ 176,190

45

FAITHLIFE FINANCIALNotes to the Financial Statements(in thousands of dollars)




(üi) Asset quality:

The table below summarized the credit exposure of the Society from its investments in

fixed income securities by rating:

2016 2015

AAA $ 24,037 $ 22,922AR 41,915 46883A 90,928 95,188BBS 15,666 11,197

$ 172,546 $ 176,190

The assets analyzed above are based on external credit ratings obtained from various

reputable external rating agencies like Dominion Bond Rating Service (DBRS). The

rating scales are based on long-term investment horizons under the following broad

investment grade definitions:

AAA The financial instrument is judged to be of the highest quality, with minimal credit

risk and indicates the best quality issuers that are reliable and stable.

AP The financial instrument is judged to be of high quality and is subject to very low

credit risk and indicates quality issuers.

A The financial instrument is considered upper-medium grade and is subject to low

credit risk although certain economic situations can more readily affect the issuers’

financial soundness adversely than those rated AAA or PA.

BBB The financial instrument is subject to moderate credit risk and indicates medium

class issuers, which are currently satisfactory. BBS is the lowest grade rating

considered to be of investment quality.

(iv) Reinsurance

Under the terms of reinsurance agreements, reinsurers agree to reimburse the ceded

amount in the event that a gross claim is paid. However, the Society remains liable to its

policyholders regardless of whether the reinsurer meets the obligations it has assumed.

Consequently, the Society is exposed to credit risk arising from the creditworthiness of

reinsurers as counterparties.

46





(iv) Reinsurance (continued):

The Society monitors the financial condition of reinsurers on an ongoing basis and

reviews its reinsurance arrangements periodically. The Society has policies in place

which establishes the guidelines for the minimum security criteria for acceptable

reinsurance and monitoring the purchase of reinsurance against those criteria.

When selecting a reinsurer the Society considers its security. This is assessed from

public rating information and from internal investigations. The reinsurance receivable

balance outstanding is with AA and A rated reinsurers.

(v) Impairments:

The Society provides for credit risk by establishing allowances against the carrying value

of impaired loans and recognizing other than temporary impairments on AES securities.

In addition, the Society provides for potential future impairments by reducing investment

yields assumed in the calculation of policy liabilities. Asset impairments of $101 (2015-

$682) were recognized as at December 31, 2016.

(b) Liquidity risk:

Liquidity risk is the risk that the Society will not be able to meet all cash outflow obligations

as they come due. The Society closely manages operating liquidity through cash flow

matching of assets and liabilities. Management monitors the use of the line of credit on a

regular basis, and assesses the ongoing availability of these and alternative forms of

operating credit. Management also closely monitors the solvency and capital positions of its

principal subsidiaries opposite liquidity requirements of the Society.

In the normal course of business the Society enters into contracts that give rise to

commitments of future minimum payments that impact short-term and long-term liquidity.

The following table summarizes the principal repayment schedule of certain of the Society’s

financial liabilities.

47


Year ended December31! 2016


(b) Liquidity risk (continued):

Within 1 year to 3 years to Over 5 No fixed2016 1 year 3 years 5 years years maturity

Amounts on deposit $ - $ - $ - $ - $ 14,217

Subordinated debt - - - 4282 -

Expenses due and accrued 668 - - - -

$ 668 $ - $ - $ 4282 $ 14217

Within 1 year to 3 years to Over 5 No fixed2015 1 year 3 years 5 years years maturity

Amounts on deposit $ - $ - $ - $ - $ 14,860Subordinated debt - - - 4,417 -

Expenses due and accrued 941 - - - -

$ 941 $ - $ - $ 4A17 $ 14,860

(c) Market risk:

Market risk is the risk that the fair value or future cash flows of a financial instrument wilt

fluctuate as a result of changes in market factors. Market factors include three types of risks:

currency risk, interest rate risk and equity risk.

(i) Currency risk:

Currency risk relates to the Society operating in different currencies and converting non-

Canadian dollar earnings at different points in time at different foreign exchange levels

when adverse changes in foreign currency exchange rates occur If foreign currency

assets are acquired to back liabilities, they may be converted back to the currency of the

liability using foreign exchange contracts.

As at December 31, 2016, the Sociely’s only significant currency exposure was related

to the US dollar-denominated subordinated debt of USO $3,189 (2015— USD $3,189),

US dollar-denominated units in a private equity pooled fund of USD $2,040 (2015— USD

$2,174), and US dollar-denominated corporate bonds of $Nil (2015 - USD $260). An

increase or decrease in foreign currency rates would have no effect on actuarial

liabilities,

48




(c) Market risk (continued):

(ii) Interest rate risk:

The Society’s exposure to changes in interest rates is concentrated in the investment

portfolio, and to a lesser extent its debt obligations.

Interest rate risk exists if asset and liability cash flows are not closely matched and

interest rates change causing a difference in value between the asset and liability. The

Society utilizes a formal process for managing the matching of assets and liabilities. This

involves grouping general fund assets and liabilities into segments. Assets in each

segment are managed in relation to the liabilities in the segment. Cash flows for assets

and liabilities in total are also reviewed for interest rate risk.

Interest rate risk is managed by investing in assets that are suitable for the products

sold. For products with fixed and highly predictable benefit payments, investments are

made in fixed income assets that closely match the liability product cash flows.

Protection against interest rate change is achieved as any change in the fair market

value of the assets will be offset by a similar change in the fair market value of the

liabilities.

For products with less predictable timing of benefit payments, investments are made in

fixed income assets with cash flows of a shorter duration than the anticipated timing of

benefit payments, or equities as described below.

The risk associated with the mismatch in portfolio duration and cash flow, asset

prepayment exposure and the pace of asset acquisition are quantified and reviewed

regularly.

Projected cash flows from the current assets and liabilities are used to determine

actuarial liabilities. Gash flows from assets are reduced to provide for potential asset

default losses. Testing under several interest rate scenarios (including increasing anddecreasing rates) is done to assess reinvestment risk.

See note 13(d) for interest rate sensitivity analysis.

49

FAITHLIFE FINANCIALNotes to the Financial Statements(In thousands of doliars)




(iH) Equity risk:

Equity risk is the uncertainty associated with the value of assets arising from changes in

equity markets. To mitigate equity risk, the Society has investment policy guidelines in

place that provide for prudent investment in equity markets within clearly defined limits.

Some policy liabilities are supported by equities. Liabilities which are equity index-linked

will fluctuate in line with equity market values. There could be additional impacts on other

policy liabilities as equity market values fluctuate. A 10% increase or decrease in equity

markets would be expected to impact actuarial liabilities by an immaterial amount.

Equities designated as AFS generally do not support actuarial liabilities. Changes in fair

value of AFS equities are recorded to other comprehensive income. For the Society’s

AFS equities, an immediate 10% increase in stock prices at December 31, 2016, would

result in an estimated after-tax increase in other comprehensive income of $3,812 (2015

- 53,009). Conversely, an immediate 10% decrease in stock prices would result in an

estimated after-tax decrease in other comprehensive income of $3,812 (2015- $3,009).

(iv) Concentration risk:

The Society establishes enterprise-wide investment portfolio level targets and limits toensure that portfolios are widely diversified across asset classes and individualinvestment risks.

Market risk concentrations of the Society’s investments at December31 are as follows:

2016 2015

Bonds rated at investment grade BBB or higher 100% 100.0%Bonds rated at A or higher 90.9% 93.6%Government bonds as a percent of total bonds 53.6% 50.4%Highest exposure to a single non-government

bond issuer $ 6,436 $ 7,690Largest single issuer as a percent of total stock portfolio 5.7% 7.5%Publicly listed corporations as a percent of total

stock portfolio 100.0% 100.0%

50





(v) Segregated funds market value risk:

Segregated funds provide an insurance guarantee that a member’s investment will not

fall below a minimum value at a specified maturity date or upon the member’s death.

The actuarial liabilities for segregated funds will generally fluctuate in a direction opposite

that of financial market value changes, as the costs of the guarantees become higher

when market values decrease and are lower when these values increase.

Since the segregated funds offer bond and stock investment options, this business is

subject to both interest rate risk and to equity risk. These risk exposures are quantified

and reviewed regularly.

An immediate 10% increase or decrease in the market value of the segregated fund unit

values at December 31, 2016 would impact actuarial liabilities by an immaterial amount,

as there is a minimum level of liability held for the risks associated with this business.

(d) Operational risk:

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes

associated with the Society’s processes, personnel, technology and infrastructure, and from

external factors other than credit, market and liquidity risks, such as those arising from legal

and regulatory requirements and general accepted standards and corporate behaviour.

Operational risks arise from all the Society’s operations.

The Society’s objective is to manage operational risk so as to balance the avoidance of

financial losses and damage to the Society’s reputation with overall cost effectiveness and

to avoid control procedures that restrict initiative and creativity.

The primary responsibility for the development and implementation of controls to address

operational risk is assigned to senior management. The responsibility supported by thedevelopment of overall Society standards for the management of operational risk are asfollows:

• Requirements for appropriate segregation of duties, including lhe independent

authorization of transactions

• Requirements for the reconciliation and monitoring of transactions

• Regular review and assessment of the design effectiveness and operating

effectiveness of internal controls under the Society’s internal controls framework

51




(d) Operational risk (continued):

• Compliance with regulatory and legal requirements

• Requirements for periodic assessment of operational risks faced, and the adequacy

of controls and procedures to address the risk identified

• Requirements for the reporting of operational losses and proposed remedial action

• Development of contingency plans

• Training and professional development

• Ethical and business standards

• Risk mitigation, including reinsurance where this is effective.

13. Insurance risk:

The Society assumes insurance risk by issuing insurance contracts, under which the Society

agrees to compensate the policyholder or other beneficiary, if a specified future event (the

insured event) affecting the policyholder occurs. Insurance claims risk includes mortality,

longevity and morbidity risk.

For accounting purposes, insurance risk is defined as risk other than financial risk. Contracts

issued by the Society may include both insurance and financial risk; contracts with significant

insurance risk are classified as insurance contracts, while contracts with no or insignificant

insurance risk are classified as investment contracts. The Society’s approach to financial risk

management has been described in note 12.

Insurance risk is the risk of loss due to actual experience differing from the experience assumed

when a product was designed and priced with respect to claims, policyholder behaviour and

expenses. A variety of assumptions are made related to the future level of insurance claims,

policyholder behaviour, expenses and sales levels when products are designed and priced, as

well as in the determination of actuarial Iiabilities The development of assumptions for future

insurance claims are based on Society and industry experience; assumptions for policyholder

behaviour are based on Society experience and predictive models; assumptions for expenses

and sales levels are based on Society experience. Such assumptions require a significant

amount of professional judgment; however, actual experience may be materially different than

the assumptions made by the Society.

52


Year ended December31! 2016

13. Insurance risk (continued):

(a) Risk management objectives and policies for mitigating insurance risk:

The Society manages its insurance risks through the following mechanisms:

• The diversification of business over several classes of insurance and large numbers

of uncorrelated individual risks, by which the Society seeks to reduce variability in

claims experience.

• The maintenance and use of sophisticated management information systems, which

provide current data on the risks to which the business is exposed.

• Actuarial models! which use the above information to calculate premiums and monitor

claims patterns.

• Guidelines for concluding insurance contracts and assuming insurance risks. These

include underwriting principles and product pricing procedures.

• The mix of assets, which is driven by the nature and term of the insurance liabilities.

The management of assets and liabilities is closely monitored.

(b) Terms and conditions of insurance contracts:

The terms and conditions attached to insurance contracts determine the level of insurance

risk accepted by the Society. The following tables outline the general form of terms and

conditions that apply to contracts sold in each category of business, and the nature of the

risk incurred.

The extent of the Society’s discretion as to the allocation of investment return to

policyholders varies based on the type of contract. Where the contracts are pure risk type,

there is no sharing of investment returns. For other contracts, investment return is attributed

to the policyholder.

In addition to the specified risks identified above, the Society is subject to the risk that

policyholders discontinue the insurance policy through lapse or surrender.

(b) Management of insurance risks:

The table below summarizes the variety of insurance risks to which the Society is exposed,

and the methods by which it seeks to mitigate these risks.

53




(c) Management of insurance risks:

Risks Definition Risk Management

Underwriting Misalignment of policyholders tothe appropriate pricing basis orimpact of anti-selection, resultingin a loss.

Experience is closely monitored.For universal life business,

mortality rates can be reset.Underwriting limits, health

requirements, spread of risksand training of underwriters all

mitigate the risk.

Mortality

Morbidity

Higher mortality rates than thosecharged for in life insurancepremiums, resulting in a loss.

Higher rates of claim incidenceand/or lower rates of recovery,resulting in a loss.

Experience is closely monitored.For dividend paying policies,dividends can be modified if

experience is different than assumed.For non-dividend paying policies,

the mortality risk is largely reinsured.

Experience is closely monitored.The morbidity risk is shared with

reins urers.

Investment returns Lower yield curves and highervolatilities cause investmentguarantee reserves to increase.

Experience is closely monitored.For dividend paying policies,dividends can be modified if

experience is different than assumed.Asset liability management is employed

to match returns and duration ofinvestments with those assumed

in the pricing of the insurance product.

Longevity

Policyholderbehaviour

Possible increase inannuity costs due topolicyholders living longer

Selection of more expensiveoptions, or lapse and re-entrywhen premium rates aredecreasing.

The pricing for long-term annuitiesuses a relatively conservative

mortality assumption.

Experience is closely monitored,and policyholder behaviour is

allowed for in pricing and valuation.

Catastrophe Natural and non-naturaldisasters could result inincreased mortality riskand payouts on policies.

The Society has limited exposure tonatural disasters, as its risks are spread

out geographically and are uncorrelated.

54


Year ended December31. 2016


(c) Management of insurance risks (continued):

Many of the above risks are concentrated by line of business (for example! longevity risk is

primarily attached to annuities). The Society, through diversification in the types of business

it writes, attempts to mitigate this concentration of risk.

(d) Sensitivity analysis:

Changes in key assumptions used to value insurance contracts would result in increases or

decreases to the insurance contract liabilities recorded, with corresponding decreases or

increases to profit.

The increase or decrease to insurance contract liabilities, and hence the impact on profit or

loss and surplus, recorded as of December31, 2016 has been estimated as follows:

Percentage change Change Change

Assumption in assumption in net liabilities in pre-tax income

Mortality and morbidity rates +10% $ 3,963 $ (3,963)

Mortality rates - annuities -10% 191 (191)

Lapse rates - lapse-supported -10% 1,345 (1,345)

Lapse rates - non lapse-supported +10% 2,065 (2,065)

Expenses +10% 2012 (2,012)

Discount rate -10% 12,861 (6,144)

The changes in insurance contract liabilities shown are calculated using the specified

increase or decrease to the rates, with no change in charges paid by policyholders.

Appropriate dividend changes, according to established dividend policy provisions, have

been incorporated into the changes for the mortality, expense and discount rate

assumptions.

The change in liabilities for the valuation discount rate sensitivity reflects a change in the

assumed discount rates without any corresponding change in earned investment income or

in the expense inflation rate. It should be noted that where the assets and liabilities of a

product are closely matched, the net effect has been shown in pre-tax income since the

asset values and liability values move in parallel.

55




(e) Insurance risk and policies for mitigating insurance risk:

The primary activity of the Society relates to the assumption of the risk of loss from events

involving persons or organizations. Such risks may relate to life insurance and health

benefits. As such, the Society is exposed to the uncertainty surrounding the timing, frequency

and severity of claims under insurance contracts.

The theory of probability is applied to the pricing and provisioning for a portfolio of insurance

contracts. The principal risk is that the frequency and/or severity of claims is greater than

expected during the measurement period and that the Society does not charge premiums

appropriate for the risk accepted. Insurance events are, by their nature, random, and the

actual number and size of events during any one year may vary from those estimated using

established statistical techniques.

The Society manages its insurance risk through underwriting limits, approval procedures for

transactions that involve new products or that exceed set limits, pricing guidelines,

centralized management of reinsurance and monitoring of emerging issues. These actions

are described below:

(i) Underwriting strategy:

The Society underwriting strategy seeks diversity to ensure a balanced portfolio and is

based on a large portfolio of similar risks spread over a large geographical area. The

underwriting strategy is set out in an annual business plan that determines the classes

of business to be written, the territories in which business is to be written and the industry

sectors to which the Society is prepared to accept exposure.

This strategy is cascaded down to individual underwriters through detailed underwriting

authorities that set the limits for underwriters by line and size in order to enforce

appropriate risk selection within the portfolio. The single largest gross risk (based on

estimated maximum loss) to which any one underwriter can commit the Society is $1,500

for life insurance.

On a monthly basis! the underwriting results are monitored against pre-determined

budgets. In the event that it does not deliver underwriting results within accepted

parameters, corrective measures are implemented, including the possible cancellation

of products or distribution arrangements going forward.

56




(e) Insurance risk and policies for mitigating insurance risk (continued):

(ii) Reinsurance strategy:

The Society reinsures a portion of the risks it underwrites in order to control its exposures

to losses and protect capital resources. The Society buys a combination of proportional

and non-proportional reinsurance treaties to reduce the net exposure of the Society on

any one risk to a maximum of $375 for life insurance, $137 for critical illness insurance

and S6 per annum for disability insurance.

Although claims in excess of these limits are recoverable from the companies that have

assumed the reinsurance coverage, the Society remains liable to the beneficiaries on

these policies. From September 1, 1987 to September 30, 1992, the Society reinsured

the mortality and investment risk on certain single premium immediate annuity business.

This arrangement is now closed for new business! although the business reinsured

continues to be in effect.

Reinsurance premiums paid during the year amounted to $2,250 (2015 -$2,150).

The Society monitors the financial condition of its reinsurers to minimize its exposure to

credit risk and has not incurred any such loss during the year, or in prior years, as a

result of reinsurance transactions.

(iii) Concentrations of insurance risk and policies mitigating concentrations:

Within the insurance process, concentrations of risk may arise where a particular event

or series of events could impact heavily upon the Society’s resources.

The Society has exposure to life and health lines of insurance business with very limited

exposure to specialised areas of insurance. The Society’s reinsurance policy limits the

losses in any one class of business.

(iv) Exposure relating to catastrophe events:

The Society sets out the total aggregate exposure that it is prepared to accept in certain

territories to a range of events such as natural catastrophes. The aggregate position is

reviewed annually. The Society uses a number of modelling tools to monitor aggregation

and to simulate catastrophe losses in order to measure the effectiveness of the

reinsurance programmes and the net exposure of the Society.

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(e) Insurance risk and policies for mitigating insurance risk (continued):

(iv) Exposure relating to catastrophe events (continued):

The Society considers that its most significant exposure would arise in the event of a

pandemic. This analysis has been performed through identifying key concentration of

risks based on different classes of businesses exposed in the event of such an incident.

The Society’s policies for mitigating catastrophe risk exposure include the use of both

proportional and non-proportional reinsurance. In the event of a major catastrophe, such

as a pandemic, the net retained loss is expected to represent less than $12,630 (2015-

$ 11,230).

(v) Other risks and policies mitigating these risks:

Insurance companies are exposed to the risk of false, invalid and exaggerated claims.

Fraud detection measures and procedures are also in place to manage the Society’s

ability to proactively detect fraudulent claims,

14. Investment income:

An analysis of the sources of investment income is as follows:


Cash and cash equivalents $ - $ - $ 45 $ 45

Bonds and debentures 7,465 - - 7,485Stocks - 1,212 - 1,212

Equity pooled funds - 821 - 821

Real estate pooled funds - 2 - 2Mortgage loans on real estate - - 2,423 2,423

Policy loans - - 634 634

Investment property - - 676 676

Sundry investment income - - (109) (109)

Changes in fair value of FVTPL securities (35) - - (35)

Realized gains on AFS securities - 480 - 480

Net investment income $ 7,440 $ 2,515 $ 3,669 $ 13,634

Investment expenses, including real estateoperating costs (760)

Net investment income and expenses $ 12,874

58



14. Investment income (continued)

15.


Cash and cash equivalents $ - $ - $ 57 $ 57

Bonds and debentures 7,665 - - 7,665

Stocks - 1,248 - 1,248

Equity pooled funds - 569 - 569

Real estate pooled funds - 5 - 5

Mortgage loans on real estate - - 2,381 2,381

Policy loans - - 647 647

Investment property - - 759 759

Sundry investment income - - (693) (693)

Changes in fair value of FVTPL securities (3,491) - - (3,491)

Realized gains on AFS securities - 1,720 - 1,720

Net investment income $ 4,174 $ 3,542 $ 3,151 $ 10,867

Investment expenses, including real estateoperating costs (1,285)

Net investment income and expenses S 10,100

Lines of business:

The Society operates in Canada only, and has three main lines of business: life and health

insurance, annuities and investment products, and corporate operations. Line of business

information is as follows:

Life and health Annuity andinsurance investment Corporate

2016 productions products operations Total

Policy revenue $ 16,186 $ 7,736 $ - $ 23,922

Net investment income 8,801 2,257 2,576 13,634

Other income - (82) 610 528

Total revenue 24,987 9,911 3,186 38,084

Policy claims and benefits 9,490 9,969 - 19,459

Change in policy liabilities 390 (4,344) - (3,954)

Interest on amounts on deposit 349 16 - 365

Interest expense - - 330 330

Commissions 1,850 1,149 - 2,999

Members’ dividends 3,627 13 - 3,640

Total expenditures 15,706 6,803 330 22,839

Segment income $ 9,281 $ 3,108 $ 2,856 $ 15,245

Generat operating expense and fratemal benefits 14,081

Corporate taxes 38814,469

Net income $ 776

59



15. Lines of business (continued):

16.

No income taxes have been recognized directly in accumulated other comprehensive income.

Life and health Annuity andinsurance investment Corporate

2015 productions products operations Total

Policy revenue $ 16,324 $ 6,750 $ - $ 23,074

Net investment income 5684 1,737 3,446 10,867

Other income - (154) (274) (428)

Total revenue 22,008 8,333 3,172 33,513

Policy claims and benefits 10,939 11,756 - 22,695Change in policy liabilities (3,120) (6,993) - (10,113)

Interest on amounts on deposit 377 15 - 392

Interest expense - - 338 336

Commissions 2,050 1,252 - 3,302Members’ dividends 3,470 4 - 3,474

Total expenditures 13,716 6,034 338 20,088

Segment income $ 8,292 $ 2,299 $ 2,834 $ 13,425

General operating expense and fraternal benefits 13,015Corporate taxes 152

13,167

Net income $ 258

Income and other taxes:

Income tax expense is composed of the following:

2016 2015

Current tax expense:Current period $ 406 $ 157

Adjustments for prior periods (18) (5)

388 152

Deferred tax expense:Origination and reversal of temporary differences (44) 1,188

Change in unrecognized deductible temporary differences 44 (1,188)

Total income tax expense $ 388 $ 266

60



16. Income and other taxes (continued):

Reconciliation of effective tax rate:

2016 2015

Net income before tax $ 1,164 $ 410

Income tax using the Society’s tax rate 310 109

Non-deductible expenses 98 10

Tax exempt revenues (396) (383)

Change in unrecognized deductible temporary differences 44 1,188

Change in tax rate 8 (42)

Over provided in prior years (18) (5)

Gain on available-for-sale securities 123 (764)

Other differences 219 39

Total income tax expense $ 388 $ 152

Unrecognized deferred tax assets:

The Society has deductions available to reduce possible income subject to income taxes in future

years of $14,721 (2015 -$14,882) with additional Ontario tax credits of $771 (2015 -$676). The

following deferred tax assets have not been recognized in respect of these items because 1 is

not yet considered probable that future taxable profit will be available against which the Society

can utilize the benefits.

2016 2015

Deductible temporary differences $ 273 $ 511

Tax losses 4,878 4,703

Ontario tax credits 771 676

$ 5,922 $ 5,890

17. Outsourced policy administrative functions:

The Society outsources its policy administration services function on the McCamish system. The

term of this agreement is to December31, 2023. Under the terms of the current agreement, the

charges for administrative services are variable, dependent on the volume of new business sold,

and the volume of business in force. In 2015, the charges incurred for such services were $2,342

(2015 -$2,316).

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18. Personnel expenses and benefits:

2016 2015

Salaries and wages $ 4791 $ 4,407

Compulsory benefit expenses 779 926

Pension and benefit plans expense 822 760

Increase in liability for employee future benefit 53 (8)

$ 6445 $ 6,085

19. Contingencies:

In the normal course of business, the Society is involved in the ongoing settlement of certain

policy benefits, the outcome of which is not presently determinable. Any liabilities that may arise

from such settlements are provided for in the normal determination of the policy liabilities.

20. Related parties:

(a) Investment in subsidiary:

On December31, 2015, the Society owned 100% of the common shares outstanding of Fl

Capital Ltd. On May 4, 2016, the Society sold 100% of the common shares outstanding in

Fl Capital Ltd. for $605, resulting in a gain on sale of $79.

(b) Related party transactions:

During the year, the Society had the following transactions with its wholly-owned subsidiary,

Fl Capital LW.:

2016 2015

Investment management fees paid $ 124 $ 500Rental income received 8 35

Included in insurance and other receivables at December 31, 2015, is a balance of $384

which relates to amounts owing from Fl Capital Ltd. related to amounts owed for

reimbursement of expenses paid for by the Society and a loan outstanding. The loan was

forgiven prior to the sale of the subsidiary.

These transactions are in the normal course of operations and are measured at the

exchange amount, which is the amount of consideration established and agreed to by the

related parties.

62


Year ended December31. 2016

20. Related parties (continued):

(c) Key management personnel and directors’ compensation:

In addition to their salaries, the Society also provides health and other benefits to executive

officers, and contributes to post-employment health and retirement benefit plans on their

behalf.

Key management personnel and directors compensation is comprised of:

2016 2015

Base salary and bonus $ 1,196 $ 1,230Health and other benefits 128 122Retirement benefits 196 205

Total S 1,520 $ 1,557

21. Segregated Funds:

The Society sells a number of segregated funds products which it administers on behalf of

members. Subject to limited guarantees provided by the Society, investors in these funds bear

the full investment risk of, and receive all the benefits from, the assets of the funds.

(a) Financial assets for segregated funds:

Financial assets for segregated funds contracts are recorded at fair value with changes in

fair value recorded in net income together with the offsetting changes in fair value of the

corresponding financial liabilities for segregated funds contracts.

63



21. Segregated Funds (continued):

(b) Financial liabilities for segregated funds:

The fair value of financial liabilities for segregated funds contracts is equal to the fair value

of the financial assets for segregated funds contracts.

2Q16 2015

Asia Pacific Equity Fund $ 615 $ 729Balanced Fund (Jarislowsky) 268 294Balanced Fund (Laketon) 7,404 8,333Balanced Fund (McLean Sudden) 4,825 5,145Balanced Fund (Scheer Rowlett) 610 879Balanced Fund (TDQC) 290 318Canadian Bond Fund (Indexed) 238 323Canadian Bond Fund 8,655 10,240Canadian Equity Fund (Core 2) 257 291Canadian Equity Fund (Core) 1,702 1,602Canadian Equity Fund (Growth 2) 264 540Canadian Equity Fund (Growth) 6,782 7.446Canadian Equity Fund (Indexed) 144 153Canadian Equity Fund (Value) 2,732 2,464Canadian Small Cap Equity Fund 5,109 6,940Enhanced Dividend Fund 56,123 50,660European Equity Fund 387 430Global Bond Fund 371 376Global Equity Fund 2 56 61Global Equity Fund 2,148 2,215International Equity Fund (Indexed) 83 93Money Market Fund 2 142 83Money Market Fund 1,642 1,776US Equity Fund (Indexed) 27 48

$ 103,877 $ 101,439

Fund assets are represented by investments in the above funds managed by third partyinvestment managers.

64



21. Segregated Funds (continued):

(b) Financial liabilities for segregated funds:

Changes in financial liabilities for segregated funds contracts for the years ended December

31, 2016 and 2015 are as follows:

2016 2015

Segregated funds assets, beginning of year $ 101,439 $ 123,873

Additions (deductions):Members’ deposits 3,239 4,196

Net investment income (loss) and gains(losses) on investments 15,894 (3,324)

Management and administrative fees (2,933) (3,377)Members’ withdrawals (13,762) (19,929)

2,438 (22,434)

Segregated funds assets, end of year $ 103,877 $ 101,439

65



22. Financial assets and liabilities:

The following table presents financial assets and liabilities that the Society expects to recover or

settle in 12 months or greater at December31, 2016 and December31 2015.

2016 2015

Bonds and debentures $ 170948 $ 174.670Stocks 28,219 23,541

Equity pooled funds 9903 6,548

Mutual funds 1,131 1,054

Real estate pooled funds - 21Mortgage loans on real estate 43,289 57,666Deferred tax assets 218 199Reinsurance recoverable 2455 (579)Policy loans 9063 9,249

Segregated fund assets 103877 101,439

Total assets $ 369,103 $ 373,808

Insurance contract liabilities $ 202,383 $ 202,770

Members’ dividends, policy proceeds and otheramounts on deposit 14,217 14,860

Provision for members’ dividends 3,503 3,597

Segregated fund liabilities 103,877 101,439Subordinated debt 4,282 4,417

Other liabilities 9,021 8,937

Total liabilities $ 377,283 $ 336,020

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